Stockholders' Equity

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Chapter 15 Stockholders' Equity

QUESTIONS
1. In the absence of restrictive provisions, what are the basic rights of
stockholders of a corporation?
2. Why is a preemptive right important?
3. Distinguish between common and preferred stock.
4. Why is the distinction between paid-in capital and retained earnings
important?
5. Explain each of the following terms: authorized capital stock, unissued
capital stock, issued capital stock, outstanding capital stock, and treasury
stock.
6. What is meant by par value, and what is its significance to stockholders?
7. Describe the accounting for the issuance for cash of
nopar value common stock at a price in excess of the stated value of the common
stock.
8. Explain the difference between the proportional method
and the incremental method of allocating the proceeds of lump-sum sales of
capital stock.
9. What are the different bases for stock valuation when assets
other than cash are received for issued shares of stock?
10. Explain how underwriting costs and accounting and
legal fees associated with the issuance of stock should be recorded.
11. For what reasons might a corporation purchase its own
stock?
12. Discuss the propriety of showing:
(a) Treasury stock as an asset.
(b) “Gain” or “loss” on sale of treasury stock as
additions to or deductions from income.
(c) Dividends received on treasury stock as income.
13. What features or rights may alter the character of
preferred stock?
14. Dagwood Inc. recently noted that its 4% preferred
stock and 4% participating preferred stock, which are both cumulative, have
priority as to dividends up to 4% of their par value. Its participating
preferred stock participates equally with the common stock in any dividends in
excess of 4%. What is meant by the term participating?
Cumulative?
15. Where in the financial statements is preferred stock normally
reported?
16. List possible sources of additional paid-in capital.
17. Satchel Inc. purchases 10,000 shares of its own
previously issued $10 par common stock for $290,000. Assuming the shares are
held in the treasury with intent to reissue, what effect does this transaction
have on (a) net income, (b) total assets, (c) total paid-in capital, and (d)
total stockholders’ equity?
18. Indicate how each of the following accounts should be classified
in the stockholders’ equity section.
(a) Common Stock.
(b) Retained Earnings.
(c) Paid-in Capital in Excess of Par—Common Stock.
(d) Treasury Stock.
(e) Paid-in Capital from Treasury Stock.
(f) Paid-in Capital in Excess of Stated Value—Common
Stock.
(g) Preferred Stock.
19. What factors influence the dividend policy of a
company?
20. What are the principal considerations of a board of
directors in making decisions involving dividend declarations?
Discuss briefly.
21. Dividends are sometimes said to have been paid “out of
retained earnings.” What is the error, if any, in that statement?
22. Distinguish among: cash dividends, property dividends,
liquidating dividends, and stock dividends.
23. Describe the accounting entry for a stock dividend, if
any.
Describe the accounting entry for a stock split, if any.
24. Stock splits and stock dividends may be used by a
corporation to change the number of shares of its stock outstanding.
(a) What is meant by a stock split effected in the form of
a dividend?
(b) From an accounting viewpoint, explain how the stock split
effected in the form of a dividend differs from an ordinary stock dividend.
(c) How should a stock dividend that has been declared but
not yet issued be classified in a balance sheet? Why?
25. The following comment appeared in the notes of
Colorado
Corporation’s annual report: “Such distributions, representing proceeds from
the sale of Sarazan, Inc., were paid in the form of partial liquidating
dividends and were in lieu of a portion of the Company’s ordinary cash
dividends.”
How would a partial liquidating dividend be accounted for in the financial
records?
26. This comment appeared in the annual report of MacCloud
Inc.: “The Company could pay cash or property dividends on the Class A common
stock without paying cash or property dividends on the Class B common stock.
But if the Company pays any cash or property dividends on the
Class B common stock, it would be required to pay at least the same dividend on
the Class A common stock.” How is a property dividend accounted for in the
financial records?
27. For what reasons might a company restrict a portion of
its retained earnings?
28. How are restrictions of retained earnings reported?
*29. McNabb Corp. had $100,000 of 7%, $20 par value
preferred stock and 12,000 shares of $25 par value common stock outstanding
throughout 2014.
(a) Assuming that total dividends declared in 2014 were $64,000,
and that the preferred stock is not cumulative but is fully participating,
common stockholders should receive 2014 dividends of what amount?
(b) Assuming that total dividends declared in 2014 were $64,000,
and that the preferred stock is fully participating and cumulative with
preferred dividends in arrears for 2013, preferred stockholders should receive
2014 dividends totaling what amount?
(c) Assuming that total dividends declared in 2014 were $30,000,
that the preferred stock is cumulative, nonparticipating, and was issued on
January 1, 2013, and that $5,000 of preferred dividends were declared and paid
in 2013, the common stockholders should receive
2014 dividends totaling what amount?

BE15-2 Swarten Corporation issued 600 shares of no-par common stock for $8,200.
Prepare Swarten’s journal entry if (a) the stock has no stated value, and (b)
the stock has a stated value of $2 per share.

BE15-4 Ravonette Corporation issued 300 shares of $10 par value common stock
and 100 shares of $50 par value preferred stock for a lump sum of $13,500. The
common stock has a market price of $20 per share, and the preferred stock has a
market price of $90 per share. Prepare the journal entry to record the
issuance.

BE15-5 On February 1, 2014, Buffalo Corporation issued 3,000 shares of its $5
par value common stock for land worth $31,000. Prepare the February 1, 2014,
journal entry.

BE15-6 Moonwalker Corporation issued 2,000 shares of its $10 par value common
stock for $60,000. Moonwalker also incurred $1,500 of costs associated with
issuing the stock. Prepare Moonwalker’s journal entry to record the issuance of
the company’s stock.

BE15-7 Sprinkle Inc. has outstanding 10,000 shares of $10 par value common
stock. On July 1, 2014,
Sprinkle reacquired 100 shares at $87 per share. On September 1, Sprinkle
reissued 60 shares at $90 per share. On November 1, Sprinkle reissued 40 shares
at $83 per share. Prepare Sprinkle’s journal entries to record these
transactions using the cost method.

BE15-8 Arantxa Corporation has outstanding 20,000 shares of $5 par value common
stock. On August 1,
2014, Arantxa reacquired 200 shares at $80 per share. On November 1, Arantxa
reissued the 200 shares at $70 per share. Arantxa had no previous treasury
stock transactions. Prepare Arantxa’s journal entries to record these
transactions using the cost method.

BE15-10 Woolford Inc. declared a cash dividend of $1.00 per share on its 2
million outstanding shares. The dividend was declared on August 1, payable on
September 9 to all stockholders of record on August 15.
Prepare all journal entries necessary on those three dates.

BE15-11 Cole Inc. owns shares of Marlin Corporation stock classified as an
available-for-sale investment.
At December 31, 2014, the available-for-sale securities were carried in Cole’s
accounting records at their cost of $875,000, which equals their fair value. On
September 21, 2015, when the fair value of the securities was $1,200,000, Cole
declared a property dividend whereby the Marlin securities are to be
distributed on
October 23, 2015 to stockholders of record on October 8, 2015. Prepare all
journal entries necessary on those three dates.

BE15-12 Graves Mining Company declared, on April 20, a dividend of $500,000
payable on June 1. Of this amount, $125,000 is a return of capital. Prepare the
April 20 and June 1 entries for Graves.

BE15-13 Green Day Corporation has outstanding 400,000 shares of $10 par value
common stock. The corporation declares a 5% stock dividend when the fair value
of the stock is $65 per share. Prepare the journal entries for Green Day
Corporation for both the date of declaration and the date of distribution.

BE15-14 Use the information from BE15-13, but assume Green Day Corporation
declared a 100% stock dividend rather than a 5% stock dividend. Prepare the
journal entries for both the date of declaration and the date of distribution. *
BE15-15 Nottebart Corporation has outstanding 10,000 shares of $100 par value,
6% preferred stock and 60,000 shares of $10 par value common stock. The
preferred stock was issued in January 2014, and no dividends were declared in
2014 or 2015. In 2016, Nottebart declares a cash dividend of $300,000. How will
the dividend be shared by common and preferred stockholders if the preferred is
(a) noncumulative and (b) cumulative?

EXERCISES

E15-1 (Recording the Issuances of Common Stock) During its first year of
operations, Collin Raye
Corporation had the following transactions pertaining to its common stock.
Jan. 10 Issued 80,000 shares for cash at $6 per share.
Mar. 1 Issued 5,000 shares to attorneys in payment of a bill for $35,000 for
services rendered in helping the company to incorporate.
July 1 Issued 30,000 shares for cash at $8 per share.
Sept. 1 Issued 60,000 shares for cash at $10 per share.
Instructions
(a) Prepare the journal entries for these transactions, assuming that the
common stock has a par value of $5 per share.
(b) Prepare the journal entries for these transactions, assuming that the
common stock is no-par with a stated value of $3 per share.

E15-2 (Recording the Issuance of Common and Preferred Stock) Kathleen Battle
Corporation was organized on January 1, 2014. It is authorized to issue 10,000
shares of 8%, $100 par value preferred stock, and 500,000 shares of no-par
common stock with a stated value of $1 per share. The following stock transactions
were completed during the first year.
Jan. 10 Issued 80,000 shares of common stock for cash at $5 per share.
Mar. 1 Issued 5,000 shares of preferred stock for cash at $108 per share.
Apr. 1 Issued 24,000 shares of common stock for land. The asking price of the
land was $90,000; the fair value of the land was $80,000.
May 1 Issued 80,000 shares of common stock for cash at $7 per share.
Aug. 1 Issued 10,000 shares of common stock to attorneys in payment of their
bill of $50,000 for services rendered in helping the company organize.
Sept. 1 Issued 10,000 shares of common stock for cash at $9 per share.
Nov. 1 Issued 1,000 shares of preferred stock for cash at $112 per share.
Instructions
Prepare the journal entries to record the above transactions.

E15-3 (Stock Issued for Land) Twenty-five thousand shares reacquired by Elixir
Corporation for $53 per share were exchanged for undeveloped land that has an
appraised value of $1,700,000. At the time of the exchange, the common stock
was trading at $62 per share on an organized exchange.
Instructions
(a) Prepare the journal entry to record the acquisition of land assuming that
the purchase of the stock was originally recorded using the cost method.
(b) Briefly identify the possible alternatives (including those that are
totally unacceptable) for quantifying the cost of the land and briefly support
your choice.

E15-4 (Lump-Sum Sale of Stock with Bonds) Faith Evans Corporation is a regional
company which is an
SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Faith
Evans Corp. has issued
10,000 units. Each unit consists of a $500 par, 12% subordinated debenture and
10 shares of $5 par common stock. The investment banker has retained 400 units
as the underwriting fee. The other 9,600 units were sold to outside investors
for cash at $880 per unit. Prior to this sale, the 2-week ask price of common
stock was $40 per share. Twelve percent is a reasonable market yield for the
debentures, and therefore the par value of the bonds is equal to the fair
value.
Instructions
(a) Prepare the journal entry to record Evans’ transaction, under the following
conditions.
(1) Employing the incremental method.
(2) Employing the proportional method, assuming the recent price quote on the
common stock reflects fair value.
(b) Briefly explain which method is, in your opinion, the better method.

E15-5 (Lump-Sum Sales of Stock with Preferred Stock) Dave Matthew Inc. issues
500 shares of $10 par value common stock and 100 shares of $100 par value
preferred stock for a lump sum of $100,000.
Instructions
(a) Prepare the journal entry for the issuance when the market price of the
common shares is $165 each and market price of the preferred is $230 each.
(Round to nearest dollar.)
(b) Prepare the journal entry for the issuance when only the market price of
the common stock is known and it is $170 per share.

E15-6 (Stock Issuances and Repurchase) Lindsey Hunter Corporation is authorized
to issue 50,000 shares of $5 par value common stock. During 2014, Lindsey
Hunter took part in the following selected transactions.
1. Issued 5,000 shares of stock at $45 per share, less costs related to the
issuance of the stock totaling $7,000.
2. Issued 1,000 shares of stock for land appraised at $50,000. The stock was
actively traded on a national stock exchange at approximately $46 per share on
the date of issuance.
3. Purchased 500 shares of treasury stock at $43 per share. The treasury shares
purchased were issued in 2010 at $40 per share.
Instructions
(a) Prepare the journal entry to record item 1.
(b) Prepare the journal entry to record item 2.
(c) Prepare the journal entry to record item 3 using the cost method.

E15-7 (Effect of Treasury Stock Transactions on Financials) Joe Dumars Company
has outstanding 40,000 shares of $5 par common stock which had been issued at
$30 per share. Joe Dumars then entered into the following transactions.
1. Purchased 5,000 treasury shares at $45 per share.
2. Resold 2,000 of the treasury shares at $49 per share.
3. Resold 500 of the treasury shares at $40 per share.
Instructions
Use the following code to indicate the effect each of the three transactions
has on the financial statement categories listed in the table below, assuming
Joe Dumars Company uses the cost method (I 5 Increase; D 5 Decrease; NE 5 No
effect).

E15-8 (Preferred Stock Entries and Dividends) Otis Thorpe Corporation has
10,000 shares of $100 par value, 8%, preferred stock and 50,000 shares of $10
par value common stock outstanding at December 31, 2014.
Instructions
Answer the questions in each of the following independent situations.
(a) If the preferred stock is cumulative and dividends were last paid on the
preferred stock on December
31, 2011, what are the dividends in arrears that should be reported on the
December 31, 2014, balance sheet? How should these dividends be reported?
(b) If the preferred stock is convertible into seven shares of $10 par value
common stock and 4,000 shares are converted, what entry is required for the
conversion assuming the preferred stock was issued at par value?
(c) If the preferred stock was issued at $107 per share, how should the
preferred stock be reported in the stockholders’ equity section?

E15-9 (Correcting Entries for Equity Transactions) Pistons Inc. recently hired
a new accountant with extensive experience in accounting for partnerships.
Because of the pressure of the new job, the accountant was unable to review
what he had learned earlier about corporation accounting. During the first
month, he made the following entries for the corporation’s capital stock.
May 2 Cash 192,000
Capital Stock 192,000
(Issued 12,000 shares of $5 par value common stock at $16 per share)
10 Cash 600,000
Capital Stock 600,000
(Issued 10,000 shares of $30 par value preferred stock at $60 per share)
Stockholders’ Paid-in Retained Net # Assets Liabilities Equity Capital Earnings
Income
May 15 Capital Stock 15,000
Cash 15,000
(Purchased 1,000 shares of common stock for the treasury at $15 per share)
31 Cash 8,500
Capital Stock 5,000
Gain on Sale of Stock 3,500 (Sold 500 shares of treasury stock at $17 per
share)
Instructions
On the basis of the explanation for each entry, prepare the entries that should
have been made for the capital stock transactions.

E15-10 (Analysis of Equity Data and Equity Section Preparation) For a recent
2-year period, the balance sheet of Santana Dotson Company showed the following
stockholders’ equity data at December 31
(in millions).
2014 2013
Additional paid-in capital $ 931 $ 817
Common stock 545 540
Retained earnings 7,167 5,226
Treasury stock 1,564 918
Total stockholders’ equity $7,079 $5,665
Common stock shares issued 218 216
Common stock shares authorized 500 500
Treasury stock shares 34 27
Instructions
(a) Answer the following questions.
(1) What is the par value of the common stock?
(2) What is the cost per share of treasury stock at December 31, 2014, and at
December 31, 2013?
(b) Prepare the stockholders’ equity section at December 31, 2014.

E15-11 (Equity Items on the Balance Sheet) The following are selected
transactions that may affect stockholders’ equity.
1. Recorded accrued interest earned on a note receivable.
2. Declared a cash dividend.
3. Declared and distributed a stock split.
4. Approved a retained earnings restriction.
5. Recorded the expiration of insurance coverage that was previously recorded
as prepaid insurance.
6. Paid the cash dividend declared in item 2 above.
7. Recorded accrued interest expense on a note payable.
8. Declared a stock dividend.
9. Distributed the stock dividend declared in item 8.
Instructions
In the following table, indicate the effect each of the nine transactions has
on the financial statement elements listed. Use the following code: I 5
Increase, D 5 Decrease, NE 5 No effect.
Stockholders’ Paid-in Retained Net Item Assets Liabilities Equity Capital
Earnings Income

E15-12 (Cash Dividend and Liquidating Dividend) Lotoya Davis Corporation has 10
million shares of common stock issued and outstanding. On June 1, the board of
directors voted an 80 cents per share cash dividend to stockholders of record
as of June 14, payable June 30.
Instructions
(a) Prepare the journal entry for each of the dates above assuming the dividend
represents a distribution of earnings.
(b) How would the entry differ if the dividend were a liquidating dividend?

E15-13 (Stock Split and Stock Dividend) The common stock of Alexander Hamilton
Inc. is currently selling at $120 per share. The directors wish to reduce the
share price and increase share volume prior to a new issue. The per share par
value is $10; book value is $70 per share. Nine million shares are issued and outstanding.
Instructions
Prepare the necessary journal entries assuming the following.
(a) The board votes a 2-for-1 stock split.
(b) The board votes a 100% stock dividend.
(c) Briefly discuss the accounting and securities market differences between
these two methods of increasing the number of shares outstanding.

E15-14 (Entries for Stock Dividends and Stock Splits) The stockholders’ equity
accounts of G.K. Chesterton Company have the following balances on December 31,
2014.
Common stock, $10 par, 300,000 shares issued and outstanding $3,000,000
Paid-in capital in excess of par—common stock 1,200,000
Retained earnings 5,600,000
Shares of G.K. Chesterton Company stock are currently selling on the Midwest
Stock Exchange at $37.
Instructions
Prepare the appropriate journal entries for each of the following cases.
(a) A stock dividend of 5% is declared and issued.
(b) A stock dividend of 100% is declared and issued.
(c) A 2-for-1 stock split is declared and issued.

E15-15 (Dividend Entries) The following data were taken from the balance sheet
accounts of Masefield Corporation on December 31, 2013.
Current assets $540,000
Debt investments 624,000
Common stock (par value $10) 500,000
Paid-in capital in excess of par 150,000
Retained earnings 840,000
Instructions
Prepare the required journal entries for the following unrelated items.
(a) A 5% stock dividend is declared and distributed at a time when the market
price per share is $39.
(b) The par value of the common stock is reduced to $2 with a 5-for-1 stock
split.
(c) A dividend is declared January 5, 2014, and paid January 25, 2014, in bonds
held as an investment.
The bonds have a book value of $100,000 and a fair value of $135,000.

E15-16 (Computation of Retained Earnings) The following information has been
taken from the ledger accounts of Isaac Stern Corporation.
Total income since incorporation $317,000
Total cash dividends paid 60,000
Total value of stock dividends distributed 30,000
Gains on treasury stock transactions 18,000
Unamortized discount on bonds payable 32,000
Instructions
Determine the current balance of retained earnings.

E15-17 (Stockholders’ Equity Section) Bruno Corporation’s post-closing trial
balance at December 31,
2014, is shown on the next page.
At December 31, 2014, Bruno had the following number of common and preferred
shares.
Common Preferred
Authorized 600,000 60,000
Issued 200,000 10,000
Outstanding 190,000 10,000
The dividends on preferred stock are $4 cumulative. In addition, the preferred
stock has a preference in liquidation of $50 per share.
Instructions
Prepare the stockholders’ equity section of Bruno’s balance sheet at December
31, 2014.
(AICPA adapted)

E15-19 (Comparison of Alternative Forms of Financing) Shown below is the
liabilities and stockholders’ equity section of the balance sheet for Jana
Kingston Company and Mary Ann Benson Company. Each has assets totaling
$4,200,000.
For the year, each company has earned the same income before interest and
taxes.
At year end, the market price of Kingston’s stock was $101 per share, and
Benson’s was $63.50.
Instructions
(a) Which company is more profitable in terms of return on total assets?
(b) Which company is more profitable in terms of return on common stock equity?
(c) Which company has the greater net income per share of stock? Neither
company issued or reacquired shares during the year.
(d) From the point of view of net income, is it advantageous to the
stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why?
(e) What is the book value per share for each company?

E15-20 (Trading on the Equity Analysis) Presented below is information from the
annual report of
Emporia Plastics, Inc.Instructions
(a) Compute the return on common stock equity and the rate of interest paid on
bonds. (Assume balances for debt and equity accounts approximate averages for
the year.)
(b) Is Emporia Plastics Inc. trading on the equity successfully? Explain.

* E15-22 (Preferred Dividends) Matt Schmidt Company’s ledger shows the
following balances on
December 31, 2014.
7% Preferred stock—$10 par value, outstanding 20,000 shares $ 200,000
Common stock—$100 par value, outstanding 30,000 shares 3,000,000
Retained earnings 630,000
Instructions
Assuming that the directors decide to declare total dividends in the amount of
$366,000, determine how much each class of stock should receive under each of
the conditions stated below. One year’s dividends are in arrears on the
preferred stock.
(a) The preferred stock is cumulative and fully participating.
(b) The preferred stock is noncumulative and nonparticipating.
(c) The preferred stock is noncumulative and is participating in distributions
in excess of a 10% dividend rate on the common stock.

* E15-23 (Preferred Stock Dividends) Cajun Company has outstanding 2,500 shares
of $100 par, 6% preferred stock and 15,000 shares of $10 par value common. The
following schedule shows the amount of dividends paid out over the last 4
years.
Instructions
Allocate the dividends to each type of stock under assumptions (a) and (b).
Express your answers in pershare amounts using the format shown below.
Assumptions
(a) (b)
Preferred, noncumulative, Preferred, cumulative, and nonparticipating and fully
participating
Year Paid-out Preferred Common Preferred Common
2012 $13,000
2013 $26,000
2014 $57,000
2015 $76,000

* E15-24 (Computation of Book Value per Share) Morgan Sondgeroth Inc. began
operations in January
2012 and reported the following results for each of its 3 years of operations.
2012 $260,000 net loss 2013 $40,000 net loss 2014 $800,000 net income
At December 31, 2014, Morgan Sondgeroth Inc. capital accounts were as follows.
8% cumulative preferred stock, par value $100; authorized, issued, and
outstanding 5,000 shares $500,000
Common stock, par value $1.00; authorized 1,000,000 shares; issued and
outstanding 750,000 shares $750,000
Morgan Sondgeroth Inc. has never paid a cash or stock dividend. There has been
no change in the capital accounts since Sondgeroth began operations. The state
law permits dividends only from retained earnings.
Instructions
(a) Compute the book value of the common stock at December 31, 2014.
(b) Compute the book value of the common stock at December 31, 2014, assuming
that the preferred stock has a liquidating value of $106 per share.